Let me start by answering the second part of the question: loyalty is not dead. But the assumption that any company can earn the unwavering commitment of their customers is simply naive.

If you think that loyalty is the blind devotion of customers to purchase your goods and services, then it’s not only dead, it’s crazy. Many marriage vows include the phrase “until death does us part,” but there are still a lot of divorces. If people can’t stay loyal to their spouses for life, why would we think that they can remain loyal to a company?

So what is loyalty? That’s the key question. I’d like to throw out this simple definition:

The willingness to consider, trust, and forgive

A loyal customer is willing to consider new products and services you have to offer. A loyal customer is willing to consider you in their short list of suppliers for new purchases. A loyal customer is willing to trust your descriptions of new products. A loyal customer is willing to forgive you if you make a mistake (as long as it’s not repeated or egregious).

A loyal customer, however, can not be expected to purchase a product that is overly expensive, or select a service that is substandard, or put up with a consistent set of mistakes.

USAA tops the 2012 Temkin Loyalty Ratings for banking, insurance, and credit cards. Do you think it would be in that position in 2014 if the company doubled its fees and rates, cut way back on its call center training, made it difficult to file a claim, and stopped investing in mobile, which is becoming its members’ most-used channel? I don’t think so.

Loyalty is not dead, but it’s also not permanent. Companies need to constantly focus on how to keep customers loyal and not fall into the trap of relying on that loyalty.

After analyzing the connection between these ratings, we found that some companies seem to have higher loyalty levels than they seem to deserve based on their customer experience while others have lower loyalty levels.

Using that dataset, I compared actual loyalty levels with projected loyalty levels. How? By plugging each company’s experience rating into our regression model to identify what their loyalty rating should be (normalized to their industry average) based on its TER and compared that projected rating with its actual loyalty rating. In the chart below you can see the companies with the largest positive and negative variances from the model’s projections.

The companies with loyalty levels the most above the projections are USAA, Highmark, Medicaid, credit unions, and TriCare. The companies that fall the most below the projections are T-Mobile, BMW, Bosch, AT&T, and Alamo.

Let’s examine USAA as an example. Since it has very high experience ratings compared with its industry peers, our model projects that its loyalty ratings should be at the high end of banks, credit card issuers, and insurance carriers. This analysis shows that USAA’s actual loyalty levels are higher than expected, even after factoring in its wonderful customer experience.

So what?!? There’s nothing inherently good or bad with being above or below the projected loyalty level. There’s no reason to expect companies to fall directly on their projected loyalty levels.

What’s interesting about this analysis is not what’s good or bad, but WHY are some companies so far away from the projected levels. This is where I’ll leave the data behind and offer my interpretation about WHY some companies have higher than projected loyalty while others have lower than projected loyalty:

Product fit. CX is not the only component of customer value. Companies that have tailored their products and services to better meet customers’needs (like USAA and TriCare) have an even better loyalty level than their CX would suggest. If companies have a poor product offering, then their loyalty may be lower than projected (this may explain Sears and DHL).

Product quality. If companies have quality problems with their offerings, then they would have lower loyalty levels than their CX deserve (this may explain AT&T, T-Mobile, and Alamo).

Service expectations. Companies that have premium status (BMW cars and Bosch appliances) often elicit higher expectations from customers, so they don’t earn the loyalty that their CX would suggest and have to work harder.

Trapped customers. In industries where customers have a hard time switching, a bad experience may not lead to the loyalty decline anticipated by the model; the same type of situation would occur if a company is harder to move away from than it’s competitors (this may explain Medicaid, Medicare, MSN, and EarthLink).

Commoditization. In industries that have a lot of pricing comparisons, customers may overly focus on price and not award good customer experience with the level of loyalty that the model projects (this may explain Alamo). It can also push consumers that have poor experience to more quickly leave a company for its competitor (this may explain DHL).

Substitutions. In sitations where customers don’t have a lot of clear alternatives, they will be more loyal to a company than the model suggests (this may explain eBay). A company that relies on self-service may be seen as easier to move from than a company that forms more personal connections with customers (this may explain E*TRADE).

Emotionality. Sometimes customers develop a strong affinity for a brand that increases loyalty and dampens the negative effect of any poor experiences (this may explain Southwest Airlines and Apple).

These items cover three broad topics: offerings, competitive environment and customer expectations. What do you think causes companies to earn more or less loyalty than their customer experience seems to deserve?

The bottom line: CX is correlated to loyalty, but other things matter as well

Temkin Group has just released the 2012Every company makes mistakes now and then, but how willing are customers to forgive the company when it happens? Forgiveness is a valuable asset that companies earn by consistently meeting customers’ needs.

We introduced the Temkin Forgiveness Ratings last year to gauge which companies are earning this important element of loyalty. The 2012 Temkin Forgiveness Ratings include 206 companies from 18 industries and is based on a survey of 10,000 U.S. consumers.

Congratulations to the top firms in this year’s ratings: USAA, Hyatt, credit unions, H.E.B., Hy-Vee, Dollar Rent A Car, Chick-fil-A, Publix, Costco, and Amazon.com. Of course, not every company enjoys such a high degree of forgiveness from their customers, especially the companies at the bottom of the 2012 ratings: Citigroup, Charter Communications, HSBC, Chrysler dealers, EarthLink, Bank of America, Comcast, Quest, and US Airways.

We also examined industry averages and found that grocery chains have earned the most forgiveness from consumers followed by retailers, appliance makers, and parcel delivery services. But consumers are not very likely to forgive mistakes by credit card issuers, Internet service providers, and TV service providers.

We examined how individual companies are rated relative to their industry peers. USAA holds the top two spots, outpacing its credit card and banking peers by more than 30 percentage points. USAA also outpaces the insurance industry by more than 20 percentage points. Credit unions, Hyatt, US Cellular, Dollar Rent A Car, Chick-fil-A, and Bright House Networks are also more than 15 percentage points above their industry averages. Five companies fall 15 or more percentage points below their industry’s average Temkin Forgiveness Ratings: Chrysler dealers, Citigroup, Travelers, Charter Communications, and RadioShack.

We also analyzed changes from the 2011 Temkin Forgiveness Ratings. The research shows that consumers are more forgiving this year than they were last year. Led by banks and insurance carriers, all 12 industries that were in both the 2011 and 2012 Temkin Forgiveness Ratings showed improvement.Sixty-eight of the 139 companies that were in the 2011 and 2012 Temkin Forgiveness Ratings earned double-digit improvements and four companies improved by more than 25 percentage points: TD Ameritrade, Lenovo, USAA, and credit unions. Ten companies lost ground over the last year with the biggest drops coming for Citigroup, Continental Airlines, Travelers, Sears, Holiday Inn Express, and The Hartford.

Do you want to see the data? Go to the Temkin Ratings website where you can sort through all of the results for free. You can even purchase the underlying data if you want to get more access.

We just published a new Temkin Group report, The ROI of Customer Experience. The report provides groundbreaking analysis of 10,000 US consumers and 3,000 UK consumers, identifying the financial benefit of improving customer experience. Here is the executive summary:

An analysis of US and UK consumers shows that customer experience is highly correlated to loyalty. Customer experience leaders have more than a 16 percentage point advantage over customer experience laggards in consumers’ willingness to buy more, their reluctance to switch business away, and their likelihood to recommend. A modest increase in customer experience can result in a gain over three years of up to $382 million for US companies and up to £263 million for UK firms, depending on the industry. While the case for loyalty is compelling, companies should determine the business impact that customer experience has on their specific business by following our five step process. To achieve these results, however, companies must create customer experience metrics programs that embed these measurments into how they run their business.

Download report for $195

I put together this infographic which captures some of the high-level findings from the report:

I’ve started to analyze our 2011 Temkin Trust Ratings and decided to look at how trust and loyalty are connected. I started by looking at the connection between the level of trust that a consumer has in a credit card provider and the likelihood of that consumer to recommend the company.

Like this:

In this series of posts, we examine some of the top mistakes companies make in their customer experience management efforts. This post examines mistake #7: Obsessing about detractors. Customer experience programs often spend most of their time fixing problems so customers don’t dislike them, but they don’t spend enough time figuring out how to make customers love them.

It’s always important to create operating processes that deliver consistently good experiences. But consistency is a minimum requirement for strong brands. To make a deep connection with customers, experiences need to reinforce other key attributes of a brand. In a recent Temkin Group study, we found that only 14% of companies target campaigns at their brand promoters. Customer experience efforts aren’t purposely ignoring advocates, but the environment in which they operate pushes them in that direction. Here are some of the contributing factors:

Customer feedback overemphasizes problems. Customers are most articulate about their dislikes. In recent Temkin Group research, we found that 34% of US consumers give feedback to a company after a very bad experience, but only 21% did the same after a very good experience. So normal customer listening mechanisms push companies to focus on problems.

Understanding dissatisfaction does not help you understand loyalty. It might seem reasonable that focusing on dissatisfaction would help you learn about loyalty. But it turns out that the attributes that makes people unhappy are often not the same things that make them very happy. If the brakes in my car don’t work, then I’m very unhappy with the car. If my brakes work, then I don’t think about it. So companies often lack insight into what causes customers to become advocates.

Executives overreact to problems. When executives hear about a single customer issue, they often push hard on the organization to fix the problem. When they get feedback from a happy customer, they just say “great job” but don’t push their organization to make any changes. Over time, this creates a lot more energy towards fixing problems than towards creating customer advocates.

Create a stream of activity around advocacy building. You shouldn’t stop finding and fixing problems, but you need to make sure that you are also identifying and implementing things that create brand advocates. So establish a separate track of activity around “raving fans” so that it gets unique attention.

Translate the brand into desired attitudes. Customer experience management efforts should create customer attitudes and behaviors that support business objectives. So make sure you explicitly describe the desired attitudes of customers that will reinforce your brand and use that information when you design and examine experiences.

Map your customer’s journey. One of the most effective tools for understanding how customers feel about your company is a customer journey map. If you don’t understand how customers view their interactions with you, then you won’t be able to turn them into advocates.

Use alternative research. Traditional market research approaches of surveys and focus groups can uncover what people like and dislike, but they may not uncover what people really desire. Why? Because customers can’t often articulate what they really desire. That’s why you should incorporate qualitative research techniques like contextual inquiry, shadowing, and journaling.

Infuse emotion in the design. Since experiences are made up of functional, accessible, and emotional attributes, it’s critical that customer experience designs incorporate all three attributes. Make sure you put desired feelings into the design requirements.

Don’t track average or net scores. While coming up with a single metric may be interesting, it blurs the distinction between really happy and really unhappy customers. Make sure you have a measurement and goal around really happy customers. If you’re using Net Promoter Score, for instance, start tracking promoters and detractors separately.

You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.

Jobs seems to be saying that you shouldn’t bother listening to customers. Is that what companies should do?

My take: No. Companies should not stop listening to customers. But they do need to understand what they’re listening for and recognize the limitation to some listening systems.

To start the discussion, here’s a basic loyalty model that I like to use. It’s based on defining a simple hierarchy of customer needs:

Expectations: What customers think they’ll get from a company, which is heavily based on their perception of the company.

Core needs: What customers want from a company, which is heavily influenced by their perception of what is normal and mainstream in an industry.

Desires: What customers really want, which is not based on any company or industry activity and is often difficult for them to articulate.

As companies meet these needs, they build stronger emotional connections with customers. At the highest level, when they meet customers’ desires, companies end up with engaged customers — the raving fans that will promote and defend the brand.

Going back to Jobs’ comment, I agree that you can’t rely on simple customer feedback to identify their desires. Consumers weren’t telling Apple that they wanted a new MP3 player, iTunes, an Apple phone, or even Apple retail stores. Those “breakthrough” experiences came from understanding what customers really desire. In technology, desires can be even more difficult to articulate because people can’t even imagine the possibility of future capabilities.

Most customer listening efforts, which are often part of voice of the customer programs, can uncover expectations and many of customers’ core needs. But they are weak at uncovering desires. To grow the number of engaged customers, companies need to think of less traditional ways of getting customer feedback to uncover desires, like ethnography. It also helps to have a visionary like Steve Jobs who can envision the potential of technology and the evolution of consumer desires.

Unfortunately, most companies don’t have someone like Steve Jobs to rely on.

The bottom line: if you listen to customers, you might not hear their desires